NEW DELHI, June 10 (Reuters) - India's industrial output
growth dipped in April, the latest sign that rising cost of
credit and inflation are acting as brakes on the economy, which
may compel the central bank to pull back from its aggressive
monetary policy tightening.

The annual 6.3 percent expansion in production at factories,
mines and utilities compares with 8.8 percent in
March and was the slowest in three months. Friday's data was the
first of a new series with a base year of 2004-05, new
components and weightings.

Under the old series, annual industrial output growth in
April was 4.4 percent, lower than an upwardly revised 7.8
percent growth in March and below a median forecast of 5.5
percent expansion in a Reuters poll.

The industrial output data adds to evidence pointing to a
slowdown in Asia's third largest economy, which grew at an
unexpectedly modest 7.8 percent in the three months through
March, its slowest in five quarters.

Growth in big emerging economies like India and China is
cooling at the same time recoveries are stalling in the United
States and Europe.

"While the market has two sets of data points to look at,
there is no change in the industrial slowdown story," said
Anubhuti Sahay, an economist at Standard Chartered in Mumbai.

Both the old and new data series showed a slowdown in
manufacturing, which contributes about 80 percent to overall
industrial output. Under the new series, manufacturing grew an
annual 6.9 percent compared with 10.4 percent a month earlier,
while under the old series growth slowed to 4.4 percent from 8.4
percent in March.

A moderation in India's manufacturing PMI in May on weak
demand suggests expansion in the sector will remain subdued in
coming months.

Even as India's economy cools, elevated inflation is
expected to keep the central bank hawkish. Most economists still
expect the central bank to raise its main policy rate by 25
basis points at its policy review next week, after it raised
rates by a bigger-than-expected 50 basis points last month.

TIGHTENING TO CONTINUE -- FOR NOW

"Overall, the RBI (Reserve Bank of India) is unlikely to
pull the plug on the rate-tightening agenda in reaction to
sluggish factory outcomes, though the releases do lower the
scope for aggressive rate hikes in the coming months," Rao said.

Capital goods output grew an annual 14.5 percent
in April. Growth in production of consumer durable goods
including cars slumped to 3.8 percent from almost 14 percent a
month earlier as higher credit costs and fuel prices crimped
demand.

High inflation and rising interest rates also weighed on
consumer goods production, which grew just 2.9 percent compared
with almost 12 percent growth in March.

The yield on the most-traded 7.80 percent 2021 bond
eased 1 basis point to 8.26 percent after the
industrial output data release.

The central bank has raised its policy rate by a total of
250 basis points in nine moves since March 2010. But its rate
tightening moves have failed to bring headline inflation, which
was 8.66 percent in April, to its comfort zone of 4-5 percent.

Although the RBI said last month it was ready to compromise
on growth in the short term to control inflation, a
sharper-than-expected slowdown in the economy has tempered
expectations about the pace of rate tightening for the rest of
2011.

"This (IIP data) combined with the easing of PMI and a fall
in the order books of several firms would compel the RBI to go
back to its calibrated approach," said Rupa Rege Nitsure, chief
economist at Bank of Baroda in Mumbai.

Car sales in May rose at their slowest pace in two years,
and analysts predict further slowdown in the second-fastest
growing vehicle market.

The services sector, which makes up little over half of
India's GDP, expanded at its slowest pace in 20 months in May,
hit by rising prices and interest rate hikes.

Recent PMI data show input prices outpacing output prices,
suggesting manufacturers are struggling to pass on rising costs
to consumers. Business confidence in May sunk to its lowest
level since July 2010.
(Editing by Tony Munroe and Ramya Venugopal)

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